Sunday, July 23, 2006

UK Consumer Gas prices will rise up to 50% by Christmas

“If, when, and how much LNG will be brought into North America remains a critical question to the future of North American natural gas prices,” said George Given, Vice President of Global Energy’s Market Advisory Services recently. “In the next 15 years our increasing reliance on LNG will transform the continental gas market into a global gas market, a new reality that cannot be underestimated for its influence on market prices, industry financial performance and investment.”

EU gas consumers take note. The North American natural gas bubble finally disappeared in the late nineties, launching the US back onto the global LNG market; this could have profound effects—on the US economy as gas prices have more than tripled, with a much greater share of power generated by gas, over half of American homes heated by natural gas, compounding inflationary effects of the oil price increase.

As the North American continent relies more and more on LNG suppliers, there will be spillover effects into the European market. The implications are profound: for example, gas to generate steam to produce the Canadian oil sands, and to produce Ammonia to grow American corn for food and fuel ethanol increasingly will come from the Middle East.

"There is a potential "gap" between supply and demand, this gap appears significant over the next 2 years but then disappears as the new gas importation projects are commissioned but re-appears from 2014 onwards as we (UK) become increasingly dependent upon remote gas sources - and as demand increases.

The risk of the gap exists whatever view one takes of an outage to a source or facility due to demand variation and the underlying demand and supply....

Our analysis, using probabilities of supply problems, (Lord Patel notes no mention of supply disruption due to terrorism - see Gheislingen explosion) indicate that the UK has a potential problem in the next two years followed by a period when the size of the problem is much reduced."

In a previous study for the DTI (Jan 2006) Ilex considered the impact of gas disruption in UK heavy energy users - a telling remark is page 55 Para 8.1 " Several companies expressed concerns that the parent company would shift production to sites outside the UK". For example Pilkington Glass ( now part of Nippon Sheet Glass Co. Ltd (NSG Group) from June 2006 in a cash purchase for £1.8 billion ) have made changes to distribution warehousing which increase the importance of the Eastern Pennines (away from Liverpool) which is seen as a prelude to moving flat Plate glas production to Eastern European production sites.(Pilkington Polska Sp. z o. o. - Sandomierz Pilkington Automotive Poland Sp. z o. o. - SandomierzPilkington - IGP Sp. z o. o. - Warsaw Pilkington AGR Polska - Warsaw ?)

Effectively this is importing "energy" by another route but at the expense of forever cutting the UK industrial base. The increasing capacity of Dubai, now with the largest concentration of aluminium smelting in the world, suggests that the smelting on Anglesey will not survive the de-commissioning of Wylfa Nuclear Power Station.

Let's not forget that the two major ‘surprises’ in the last 2 decades that have affected oil / gas markets are

1. The demand surge in China2. The supply collapse and recovery of Russia

Largely unforeseen and not considered in planning policy—They remain sources of significant uncertainty especially now that Putin and the "silovaki" have demonstrated how they intend to use their energy supplies as wepaons in world trade.The growth of State and para state energy companies , Gazprom , Rosneft, LUKoil are a warning (or at least a concern) - especially when here is much talk of a take over of Centrica (who are expected to announce some dire profits soon - coupled with price rises).

WORLD MARKET

The UK has entered a dangerous position in it's use of natural gas as a source as an industry feedstock, heat energy for industrial processes and as a a fuel for CCGT electricity generation.

One would not have to be too much of a pessimist to view the world as embracing a twin time bomb: political instability in the sources of resources on the one hand and an environmentallyunsustainable pace of consumption of those resources on theother. Compounded by (in the UK) 3 Energy Reviews (99/03/06) by an Administration evidently totally mired in understanding

1. What has happened2. What may / can happen3. What they want to happen

"Looking ahead, substantial increases in domestic gas and electricity prices, and the recent rise in petrol prices, are likely to boost CPI inflation in the near term."

Which will presumably , as inflation is now 2.5% (above the 2% target) result in higher interest rates.

CONCLUSIONS

Having fittered away opportunities to get to grips with a sane sensible, rational UK energy policy we are faced with ;

1. Great Uncertainty over Gas supplies - source, quantities and prices.2. Lack of any clear national policy - other than a huge (80%) reliance on gas as a primary enegry source for electrical energy.3. Reliance upon foreign owned companies to direct future plans , determine prices and investment.

One thing is evident, that the insane ETS policy whilst it has produced some small changes , has had no impact , and does not appear to be having any future impact on investment decisions which are crucial both to the domestic and industrial gas consumers.

Result ?

You will be paying more for your gas next winter and you can expect the suppliers to raise prices whilst consumption is low in the summer. The Government will have no control over the price rises - the companies will claim if they cannot raise prices they cannot make the investments.

My guess.

Worst case, UK Domestic Consumers will be paying 50% more for gas by Christmas Day, Best case 33%.